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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to
Commission File Number: 333-3288
CS Wireless Systems, Inc.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 23-2751747
<S> <C>
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1101 Summit Avenue, Plano, Texas 75074
(Address of principal executive offices) (Zip Code)
</TABLE>
(972) 398-5300
(Registrant's telephone number, including area code)
Indicate by check-mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ x ] No [ ]
Number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Shares Outstanding
Class as of August 3, 1999
----- --------------------
<S> <C>
Common Stock, $.001 par value 6,864,471
</TABLE>
<PAGE>
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Part I - Financial Information
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets............................3
Condensed Consolidated Statements of Operations..................4
Condensed Consolidated Statements of Cash Flows..................5
Notes to Unaudited Condensed Consolidated Financial Statements...6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................9
Part II Other Information...........................................................15
Item 1. Legal Proceedings...............................................15
Item 6. Exhibits and Reports on Form 8-K................................15
Signatures .......................................................................16
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................... $ 33,536 $ 41,839
Subscriber receivables, net.................................. 869 1,542
Prepaid expenses and other................................... 707 638
----------- -----------
Total current assets.................................... 35,112 44,019
Plant and equipment, net........................................ 37,263 43,645
License and leased license investment, net...................... 153,110 157,269
Assets held for sale............................................ 2,248 2,102
Investment in and loans to equity affiliates.................... 4,164 3,884
Debt issuance costs and other assets, net....................... 7,410 7,898
----------- -----------
$ 239,307 $ 258,817
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses........................ $ 3,223 $ 5,490
Current portion of long-term debt............................ 14 199
Current portion of BTA auction payable....................... 371 354
Other current liabilities.................................... 983 1,237
----------- -----------
Total current liabilities............................... 4,591 7,280
Long-term debt, less current portion............................ 334,729 316,720
BTA auction payable, less current portion....................... 3,283 3,505
----------- -----------
Total liabilities....................................... 342,603 327,505
----------- -----------
Stockholders' deficit:
Common stock, $.001 par value; 15,000,000 shares authorized,
10,702,609 shares issued in 1999 and 1998,
and 6,864,471 shares outstanding in 1999 and 1998.......... 11 11
Treasury stock, at cost; 3,838,138 shares in 1999 and 1998... (1,574) (1,574)
Additional paid-in capital................................... 154,557 154,557
Accumulated deficit.......................................... (256,290) (221,682)
----------- -----------
Total stockholders' deficit............................. (103,296) (68,688)
----------- -----------
$ 239,307 $ 258,817
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
3
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CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue .............................. $ 5,573 $ 6,805 $ 11,513 $ 13,628
Operating expenses:
Systems operations.................. 3,678 4,017 7,859 7,925
Selling, general and administrative. 3,708 4,983 9,092 9,102
Impairment of goodwill ............. -- 46,378 -- 46,378
Depreciation and amortization....... 5,406 7,717 10,911 14,941
------------ ------------ ------------ ------------
Total operating expenses......... 12,792 63,095 27,862 78,346
------------ ------------ ------------ ------------
Operating loss......................... (7,219) (56,290) (16,349) (64,718)
------------ ------------ ------------ ------------
Other income (expense):
Interest income..................... 414 926 875 1,943
Interest expense.................... (9,475) (8,621) (18,614) (16,892)
Equity in losses of affiliates...... (150) (779) (300) (1,765)
Other .............................. (175) -- (220) --
------------ ------------ ------------ ------------
Total other expense, net......... (9,386) (8,474) (18,259) (16,714)
------------ ------------ ------------ ------------
Loss before cumulative effect of
change in accounting principle...... (16,605) (64,764) (34,608) (81,432)
Cumulative effect of change in
accounting principle for
organizational costs ............... -- -- -- (1,868)
------------ ------------ ------------ ------------
Net loss .............................. $ (16,605) $ (64,764) $ (34,608) $ (83,300)
------------ ------------ ------------ ------------
Basic and diluted loss per common
share before cumulative effect in
accounting principle................ $ (2.42) $ (6.05) $ (5.04) $ (7.62)
============ ============ =========== ===========
Basic and diluted loss per common
share .............................. $ (2.42) $ (6.05) $ (5.04) $ (7.79)
============ ============ =========== ===========
Basic and diluted loss per common
diluted shares outstanding.......... 6,864,471 10,700,506 6,864,471 10,700,506
=========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
4
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CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------
1999 1998
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................. $ (34,608) $ (83,300)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization......................................... 10,911 14,941
Accretion on discount notes and amortization of debt issuance costs... 18,435 16,498
Non-cash interest expense on other long-term debt..................... 179 392
Equity in losses of affiliates........................................ 300 1,765
Impairment of goodwill................................................ -- 46,378
Cumulative effect of change in accounting principle for
organizational costs................................................ -- 1,868
Other................................................................. 220 250
Changes in assets and liabilities, net of effects of contributions:
Subscriber receivables............................................. 673 (79)
Prepaid expenses and other......................................... (69) (281)
Accounts payable, accrued expenses and other liabilities........... (670) (2,329)
---------- -----------
Net cash used in operating activities.......................... (4,629) (3,897)
---------- -----------
Cash flows from investing activities:
Purchases of plant and equipment ..................................... (1,300) (10,557)
Additions to license and leased license investment.................... (736) (3,845)
Investment in equity affiliates....................................... (953) (931)
Investment in assets held for sale.................................... (146) --
Other................................................................. -- (136)
---------- -----------
Net cash used in investing activities.......................... (3,135) (15,469)
---------- -----------
Cash flows from financing activities:
Payments on notes payable and other................................... (157) (190)
Payments on BTA auction payable....................................... (382) (864)
---------- -----------
Net cash used in financing activities.......................... (539) (1,054)
---------- -----------
Net decrease in cash and cash equivalents.................................... $ (8,303) $ (20,420)
---------- -----------
Cash and cash equivalents at beginning of period............................. 41,839 74,564
---------- -----------
Cash and cash equivalents at end of period................................... $ 33,536 $ 54,144
========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
5
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CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
THE COMPANY. CS Wireless Systems, Inc. and its subsidiaries (the
"Company" or "CS Wireless") develop, own and operate a network of wireless
cable television systems providing subscription television and high speed
Internet access services. The Company has a portfolio of wireless cable
channel rights in various markets in the United States. The Company currently
has systems in operation in eleven markets (exclusive of the Story City, Iowa
market, contemplated to be transferred to Nucentrix Broadband Networks, Inc.
(f/k/a Heartland Wireless Communications, Inc.) pursuant to the Master
Agreement described below). The Company believes that there are a total of
approximately 7.7 million estimated total service area households in the 21
primary markets where it holds significant Multichannel Multipoint
Distribution Services and Multichannel Distribution Services channel rights
and Instructional Television Fixed Services leases. The Company is
approximately 94% owned by CAI Wireless Systems, Inc. ("CAI").
The subscription television industry is highly competitive. The
Company's principal subscription television competitors in each of its
markets are traditional hard-wire cable companies, direct broadcast
satellite, private cable companies and other alternate methods of
distributing and receiving television transmissions. Hard-wire cable
companies generally are well-established and well-known to potential
customers and have significantly greater financial and other resources than
the Company. As the telecommunications industry continues to evolve, the
Company may face additional competition from new providers of entertainment
and data services. In addition, until the Company can increase its channels
offered in all of its operating markets through the deployment of digital
compression technology, the Company's competitors in the subscription
television business generally continue to have more channels to offer
subscribers. There can be no assurance that the Company will be able to
compete successfully with existing or potential competitors in the
subscription television industry.
The Company has incurred significant operating losses since inception
and has negative stockholders' equity at June 30, 1999. Losses are expected for
at least the next year as the Company continues to develop its wireless
communications business. The Company has approximately $33.5 million in cash and
cash equivalents at June 30, 1999, and, based on its current operating plan,
believes that it has sufficient cash to fund its anticipated capital
expenditures and operating losses through at least the second quarter of 2000.
However, the growth of the Company's wireless communications business may
require substantial continuing investment to finance capital expenditures
related to the acquisition of channel rights and infrastructure development of
digital video programming, two-way frequency utilization and telephony systems.
Additionally, beginning in September 2001, the Company will be required to make
payments to the holders of its 11 3/8% Senior Discount Notes due 2006. Without
additional funding through debt or equity offerings, joint ventures, the sale or
exchange of its wireless cable channel rights or the participation of a
strategic partner, or the restructuring of its debt agreements, the Company may
not be able to meet its future payment obligations required under the notes.
There can be no assurance that the Company will achieve positive cash flow from
operations, or consummate the sale of any wireless cable channel rights or that
sufficient debt or equity financing will be available to the Company. In
addition, subject to restrictions under its outstanding debt, the Company may
pursue other opportunities to acquire additional wireless cable channel rights
and businesses that may utilize the capital currently expected to be available
for its current markets.
On April 27, 1999, CAI announced that it executed a definitive
Agreement and Plan of Merger ("Merger Agreement") with MCI WorldCom, Inc.
("MCI WorldCom") providing for the acquisition by MCI WorldCom of all of the
outstanding common shares of CAI. The consummation of the Merger Agreement is
subject to certain conditions, including the approval of the common
shareholders of CAI and the approval of the Federal Communications Commission
("FCC") to the transfer of certain licenses and authorizations. The FCC
granted on June 28, 1999, with one condition, the applications filed by CAI
and MCI WorldCom to transfer control of specific licenses and authorizations
relating to the MMDS spectrum to be transferred pursuant to the Merger
Agreement. On June 30, 1999, the FCC announced that the condition had been
fulfilled. A special meeting of the common
6
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CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
shareholders of CAI has been set for August 31, 1999 for the purpose of
voting on the approval of the Merger Agreement and the transactions
contemplated thereby. MCI Worldcom has, according to Schedule 13D, as
amended, filed on behalf of MCI WorldCom on July 27, 1999, acquired
approximately 10,684,140 shares of common stock of CAI, all of the
$80,000,000 aggregate principal amount of CAI's outstanding Senior Secured
Notes of CAI due 2000 and $119,412,609 aggregate principal amount of
unsecured 13% Senior Notes of CAI due October 14, 2004. Additionally, MCI
WorldCom has disclosed in its Schedule 13D filings that it holds
approximately $239,200,000 aggregate principal amount of the Company's notes,
described below in MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION.
In response to a demand by MCI WorldCom in accordance with
Connecticut law and CAI's bylaws, CAI has scheduled a second special meeting
of shareholders of CAI for the purposes of removing CAI's current board of
directors, amending CAI's bylaws to provide for a two-member board of
directors and electing a new CAI board consisting of two members designated
by MCI WorldCom. The special meeting of shareholders demanded by MCI WorldCom
has been set to take place immediately after the shareholders meeting set for
the purpose of voting on the approval of the Merger Agreement and the
transactions contemplated thereby.
PRINCIPAL MARKETS OF THE COMPANY. On February 23, 1996, in exchange
for approximately 60% of the Company's Common Stock, CAI, directly or
indirectly, contributed to the Company the wireless cable television assets
and certain related liabilities, or the stock of subsidiaries owning wireless
cable television assets associated with the wireless cable television markets
of Bakersfield and Stockton/Modesto, California; Charlotte, North Carolina;
and Cleveland, Ohio. Simultaneously, in exchange for approximately 40% of the
Company's Common Stock, cash, a short-term note and a long-term note (the
"Heartland Long-Term Note"), Heartland (currently known as Nucentrix),
directly or indirectly, contributed or sold to the Company the wireless cable
television assets and certain related liabilities associated with the
wireless cable television markets of Grand Rapids, Michigan; Minneapolis,
Minnesota; Kansas City (suburbs), Missouri; Dayton, Ohio; Dallas, Fort Worth
and San Antonio, Texas; and Salt Lake City, Utah. The Company subsequently
acquired wireless cable television rights and related assets in certain
Midwest markets, including but not limited to, the Effingham and Wellsville,
Kansas; Story City, Iowa; Scottsbluff, Nebraska; Kalispell, Montana and
Rochester, Minnesota markets in connection with the Company's merger
acquisition of USA Wireless Cable, Inc. on October 11, 1996 ("USA Wireless
Acquisition"). On September 3, 1997, the Company consummated an exchange of
its wireless cable rights and related assets in Salt Lake City, Utah for
wireless cable rights and related assets in Kansas City, Missouri pursuant to
an agreement dated as of November 6, 1996 with People's Choice TV Corp.
On December 2, 1998, the Company, CAI and Nucentrix entered into a
Master Agreement ("Master Agreement") providing for, among other things, the
termination of Nucentrix's rights in, and claims against, the Company. The
master agreement is to be performed in two stages. Stage I, which has been
consummated, required the Company to lease to Nucentrix certain assets
related to the Story City, Iowa market, to sell to Nucentrix certain consumer
premises equipment at agreed upon prices and to pay to Nucentrix $366,000 in
cash. In consideration, Nucentrix leased to the Company certain assets
related to the Portsmouth, New Hampshire market, effected a partial
satisfaction of the long-term note and agreed to various mutual cooperation
obligations relative to developmental applications filed by Nucentrix or the
Company for two-way authority in adjacent and overlapping markets, including
Dallas-Ft. Worth. At the Stage II closing, which is to occur following
receipt of necessary governmental approvals, the Company and Nucentrix will
transfer to one another their respective ownership interests in the Story
City, Iowa and Portsmouth, New Hampshire markets, the long-term note shall be
canceled and the Company shall pay to Nucentrix $100,000; additionally, the
Company agreed to transfer certain inventory to Nucentrix. In connection with
the master agreement, the three Nucentrix designees to the Company's board
resigned and the Stockholders Agreement among CAI, the Company and Nucentrix
was terminated. At the Stage I closing, CAI purchased all of the Company's
common stock held by Nucentrix for $1,534,000. Subsequent to the Stage I
closing, the Company redeemed the shares of the Company's common stock that
CAI acquired from Nucentrix in consideration for approximately $1.5 million
in cash. The Company solicited and obtained written consents and waivers from
the holders of a majority of the Company's outstanding notes relative to the
transactions described in this paragraph. The Company agreed to pay to the
holders of its notes, as of December 3, 1998, the aggregate sum of $1.25
million in connection with the consents and waivers that were deemed by the
Company to be necessary under the terms of the Indenture governing the
Company's notes. The payment shall be made upon the latter to occur of (i)
three business days following the Stage II closing and (ii) the date on which
the Company may be legally permitted to make such payment.
The redemption of the Company's common stock that CAI acquired from
Nucentrix reduced the total number of the Company's common shares outstanding to
6,864,471. This reduction in outstanding shares had the effect of increasing
CAI's percentage ownership of the Company to approximately 94%. The funds paid
to Nucentrix, along
7
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CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
with the carrying value of the net assets of the Story City, Iowa market, are
classified as assets held for sale at December 31, 1998 and June 30, 1999 in
the accompanying consolidated balance sheet. Pending consummation of the sale
of the Story City, Iowa market, Nucentrix is providing certain management
services in connection with the operation of the market.
(b) BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
(c) INTERIM FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of the Company contain all adjustments,
consisting only of those of a normal recurring nature, necessary to present
fairly the Company's financial position as of June 30, 1999, the results of
operations for the three and six months ended June 30, 1999 and 1998 and cash
flows for six months ended June 30, 1998 and 1997. These results are not
necessarily indicative of the results to be expected for the full fiscal year.
(d) COMMON SHARES OUTSTANDING AND NET LOSS PER COMMON SHARE
Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Potentially dilutive securities,
consisting of options to purchase shares of common stock, have been excluded
from the diluted loss per share computation as their inclusion would be
antidilutive.
(2) CONTINGENCIES
The Company is a party to legal proceedings incidental to its business.
A discussion of certain of these legal proceedings is contained in Part II, Item
1 "Legal Proceedings" of this Form 10-Q. The Company believes that the ultimate
resolution of the legal proceedings will not have a material adverse effect on
the Company's consolidated financial position, operating results or liquidity.
8
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of the
financial position as of June 30, 1999 and the results of operations of the
Company for the three and six months ended June 30, 1999 and 1998. This
discussion and analysis should be read in conjunction with the attached
unaudited condensed consolidated financial statements and notes thereto, and
with the Company's December 31, 1998 consolidated financial statements and
notes thereto.
OVERVIEW
CS Wireless and its subsidiaries develop, own and operate a network
of wireless cable television systems providing subscription television
services. The Company had systems in operation in eleven markets at June 30,
1999 (exclusive of the Story City, Iowa market which is held for sale). The
Company owns, or holds rights to lease, radio spectrum in its 21 primary
markets as well as certain other markets. The Company has commenced a limited
commercial offering of high-speed Internet access services in Dallas, Texas.
Additionally, the Company offers certain telephony services through
agreements with certain local exchange carriers and a long distance carrier.
As a result of the execution of the Master Agreement dated December 2, 1998
between the Company, CAI Wireless Systems, Inc. ("CAI") and Heartland
Wireless Communications, Inc. ("Heartland"), the carrying value of the net
assets of the Story City, Iowa market are classified as assets held for sale.
Consequently, net operating income for three and six months ended June 30,
1999 consisting of revenue of $43,000 and $181,000 and operating expense of
$54,000 and $191,000, respectively, are excluded from the condensed
consolidated statements of operations.
On April 27, 1999, CAI announced that it executed a definitive
Agreement and Plan of Merger ("Merger Agreement") with MCI WorldCom, Inc.
("MCI WorldCom") providing for the acquisition by MCI WorldCom of all of the
outstanding common shares of CAI. The consummation of the Merger Agreement is
subject to certain conditions, including the approval of the common
shareholders of CAI and the approval of the Federal Communications Commission
("FCC") to the transfer of certain licenses and authorizations. The FCC
granted on June 28, 1999, with one condition, the applications filed by CAI
and MCI WorldCom to transfer control of specific licenses and authorizations
relating to the MMDS spectrum to be transferred pursuant to the Merger
Agreement. On June 30, 1999, the FCC announced that the condition had been
fulfilled. A special meeting of the common shareholders of CAI has been set
for August 31, 1999 for the purpose of voting on the approval of the Merger
Agreement and the transactions contemplated thereby. MCI Worldcom has,
according to Schedule 13D, as amended, filed on behalf of MCI WorldCom on
July 27, 1999 acquired approximately 10,684,140 shares of common stock of CAI,
all of the $80,000,000 aggregate principal amount of CAI's outstanding Senior
Secured Notes of CAI due 2000 and $119,412,609 aggregate principal amount of
unsecured 13% Senior Notes of CAI due October 14, 2004. Additionally, MCI
WorldCom has disclosed in its Schedule 13D filings that it holds
approximately $239,200,000 aggregate principal amount of the Company's notes,
described below.
In response to a demand by MCI WorldCom in accordance with
Connecticut law and CAI's bylaws, CAI has scheduled a second special meeting
of shareholders of CAI for the purposes of removing CAI's current board of
directors, amending CAI's bylaws to provide for a two-member board of
directors and electing a new CAI board consisting of two members designated
by MCI WorldCom. The special meeting of shareholders demanded by MCI WorldCom
has been set to take place immediately after the shareholders meeting set for
the purpose of voting on the approval of the Merger Agreement and the
transactions contemplated thereby.
The statements contained in this Quarterly Report on Form 10-Q
relating to the Company's future operations may constitute forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act
of 1934, as amended. Actual results of the Company may differ materially from
those in the forward-looking statements and may be affected by a number of
factors including the ability of CAI to complete its proposed merger with MCI
WorldCom, the ability of CAI and the Company to attract an alternate
strategic partner in the event that the proposed merger is not consummated,
and risks and uncertainties set forth below in this MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and elsewhere
herein, as well as other factors contained herein and in the Company's other
filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
REVENUE. The Company's revenue primarily consists of monthly fees
paid by subscribers for basic programming, premium programming and equipment
rental. Revenue was $5.6 million and $11.5 million for the three and six
months ended June 30, 1999, compared to $6.8 million and $13.6 million for
the corresponding prior year periods, a decrease of 18.1% and 15.5%,
respectively. The decrease in revenue is primarily due to average
9
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number of subscribers decreasing to approximately 54,030 and 55,540 for the
three and six months ended June 30, 1999 (both 1999 periods are exclusive of
the Story City, Iowa subscribers) compared to approximately 67,170 and 67,335
for the corresponding prior year periods. Average revenue per subscriber
increased to approximately $34.38 and $34.55 for the three and six month
period ended June 30, 1999 compared to approximately $33.77 and $33.73 for
the corresponding prior year periods, primarily due to rate increases. The
decrease in subscriber levels is attributed to the exclusion of the Story
City subscribers described above as well as the Company's cash conservation
efforts and corresponding reduction in marketing efforts and related
expenditures.
SYSTEMS OPERATIONS. Systems operations expenses primarily include
programming costs, channel lease and copyright payments, transmitter site and
tower rentals, employee salaries and benefits, subcontractor costs, and other
costs of providing service. Programming costs (with the exception of minimum
payments) and channel lease payments (with the exception of certain fixed
payments) are variable expenses that generally increase as the number of
subscribers increases. Although a significant portion of the systems
operations expenses are variable based on subscriber levels, these expenses
may not trend directly with revenues due to significant fixed cost
components. Systems operations expenses were $3.7 million and $7.9 million
for the three and six months ended June 30, 1999, compared to $4.0 million
and $7.9 million for the corresponding prior year periods, a decrease of 8.4%
and 0.1% respectively. The decrease in systems operations expenses is
primarily due to a decline in the subscriber base partially offset by
increasing programming rates in substantially all of the Company's operating
markets.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses ("SG&A") were $3.7 million and $9.1 million for the
three and six months ended June 30, 1999, compared to $5.0 million and $9.1
million for the corresponding prior year periods, a decrease of 25.6% and
0.1% respectively. The decrease in SG&A during the three months ended June
30, 1999 compared to the corresponding prior year period is principally due
to the Company operating its business within the confines of a cash
conservation strategy. During the six month period ended June 30, 1999, the
decrease in spending pursuant to the cash conservation strategy was offset by
non-recurring payments including: (i) severance payments of approximately
$0.5 million to two former officers of the Company who left the Company in
February 1999, (ii) contract termination payments of approximately $0.4
million to ACS Telecommunications Systems, Inc., an installation service
contractor/vendor and (iii) payments to professional service advisors
totaling approximately $0.8 million relating to evaluating available options
with respect to the capitalization of the Company.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
includes depreciation of systems and equipment, amortization of licenses and
leased license investment and, in the six months ended June 30, 1998,
goodwill. Depreciation and amortization expenses were $5.4 million and $10.9
million for the three and six months ended June 30, 1999, compared to $7.7
million and $14.9 million for the corresponding prior year periods. The
decrease in depreciation and amortization expense is primarily attributed to
a corresponding decrease in the underlying capital assets, as well as
goodwill written-off in the second quarter of 1998 and thus, no goodwill
amortization expense incurred in 1999.
OPERATING LOSS. The Company incurred operating losses of $7.2
million and $16.3 million for the three and six months ended June 30, 1999,
compared to $56.3 million and 64.7 million for the corresponding prior year
periods. Consolidated earnings before interest, taxes, depreciation and
amortization and impairment of long lived assets ("EBITDA") were a negative
$1.8 million and a negative $5.4 million for the three and six months ended
June 30, 1999, compared to a negative $2.2 million and a negative $3.4
million for the corresponding prior year periods. EBITDA is a financial
measure commonly used in the industry but is not intended to represent cash
flows, as determined in accordance with Generally Accepted Accounting
Principles ("GAAP"), or as an indicator of operating performance. EBITDA
should not be considered a substitute for measures of performance prepared in
accordance with GAAP. The decrease in the Company's operating loss in both
periods presented is primarily due to the impairment of goodwill recorded in
the second quarter of 1998 and to a lesser extent, decreasing system
operations expenses, SG&A expenses and depreciation expense as described
above. These decreases in expenses were partially offset by a decrease in
revenue for the corresponding periods. The decrease in negative EBITDA for
the three months ended June 30, 1999 compared to the corresponding prior year
period is primarily due to the lower SG&A and system operations expenses as
described above. The increase in negative EBITDA for the six months ended
June 30, 1999 compared to the corresponding prior year period is primarily
due to the non-recurring payments for severance, contract termination and
professional service advisors discussed within the SG&A section, above.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
INTEREST INCOME. Interest income was $0.4 million and $0.9 million
for the three and six months ended June 30, 1999, compared to $0.9 million
and $1.9 million for the corresponding prior year periods. The decrease in
interest income is primarily due to a decrease in the average invested
balance. The average invested balance is comprised mainly of the proceeds
remaining from the sale by the Company of $400.0 million of 11 3/8% Senior
Discount Notes (the "Senior Discount Notes") in a private placement on
February 23, 1996, that resulted in net proceeds of $162.9 million (net of
debt issuance costs, payments on notes and certain distributions to Heartland
and CAI).
INTEREST EXPENSE. The Company incurred interest expense of $9.5
million and $18.6 million for the three and six months ended June 30, 1999,
compared to $8.6 million and $16.9 million for the corresponding prior year
periods. Interest expense during the three and six months ended June 30, 1999
is primarily comprised of (i) non-cash interest and accretion of deferred
debt issuance costs of $9.3 million and $18.4 million related to the Senior
Discount Notes, and (ii) interest relating to other notes payable totaling
approximately $0.2 million and $0.2 million, respectively. Interest expense
during the three and six months ended June 30, 1998 included (i) non-cash
interest and accretion of deferred debt issuance costs of $8.4 million and
$16.5 million related to the Senior Discount Notes, and (ii) interest
relating to other notes payable totaling approximately $0.2 million and $0.4
million, respectively.
NET LOSS. The Company has recorded net losses since inception. The
Company incurred net losses of $16.6 million and $34.6 million for the three
and six months ended June 30, 1999 compared to $64.8 million and $83.3
million during the corresponding prior year periods. This decrease in net
loss for both periods presented is primarily due to the impairment of
goodwill recorded in the second quarter of 1998 and to a lesser extent, the
decrease in systems operations, SG&A and depreciation and amortization
expenses partially offset by a decrease in revenue.
LIQUIDITY AND CAPITAL RESOURCES
The wireless cable television business is a capital-intensive
business. Funds are required for the lease or acquisition of channel rights,
the acquisition of wireless cable systems, the construction of system headend
and transmission equipment, the conversion of analog systems to digital
technology, and start-up costs related to the commencement of operations and
subscriber installation costs. To date, the primary source of capital of the
Company has been the net proceeds from the sale of the Senior Discount Notes.
The Company has approximately $33.5 million in cash and cash equivalents at
June 30, 1999. The Company has used the proceeds from the sale of the Senior
Discount Notes received in February 1996 primarily to fund (i) continued
operating losses, (ii) capital expenditures to launch digital video and high
speed Internet access services in the Dallas, Texas market, hybrid digital
service in the San Antonio, Texas market and a limited build-out in the
Company's analog markets (iii) strategic investments in items such as channel
capacity and (iv) general debt service.
Beginning in 1999, the Company's strategy has been to operate its
analog video systems within the confines of a cash conservation strategy,
while pursuing a strategic alliance with one or more strategic partners
interested in using the Company's spectrum for fixed, one- or two-way
transmission services. The Company's cash conservation strategy includes the
recovery of out-of-pocket expenses associated with adding a new analog video
subscriber by charging such subscriber an up-front installation fee. The cash
conservation strategy also includes the continued implementation of
cost-cutting measures and the periodic sales of non-core assets in an effort
to maximize the value of assets that are no longer used or useful to the
Company's long-term operating strategy, which is to be a wholesale provider
of two-way transmission services to one or more strategic partners.
Accordingly, the Company is considering selling certain assets relating to
the provision of video services to multiple dwelling units ("MDUs"), such as
apartment and condominium complexes, in certain of its markets. The Company
has sold certain of its MDU service contracts, but is uncertain whether a
definitive agreement will be executed for the sale of any of the Company's
remaining MDU service contracts. Additionally, the Company is considering
selling certain analog equipment held in inventory and other operating and
non-operating systems that are not considered part of the Company's long-term
business plan.
For 1999, the Company has initially budgeted approximately $17.2
million to fund operations, capital expenditures and debt service. The
significant components of the budget include approximately $7.2 million for
operations, $2.0 million for digital subscriber installations primarily
relating to MDU construction, $0.8 million for
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
analog subscriber installations, $0.5 million to test and develop two-way
technology, $0.5 million relating to Year 2000 compliance, $3.5 million for
strategic investments in items such as channel capacity, $1.0 million for
Basic Trading Area ("BTA") obligations and $1.25 million for other expenses.
The initial 1999 budget is exclusive of costs relating to obtaining a
strategic partner, costs relating to the evaluation of available options
relative to capitalization of the Company, and estimated proceeds from asset
sales, if any. The Company believes this initial budget still reflects
expected cash requirements for 1999. Based upon the Company's current
operating plans, the Company believes that its available cash will provide
sufficient funds to meet its needs for at least the next 12 months.
The combined cash flow from operating activities of the Company's
operating systems has to date been insufficient to cover the combined
operating expenses of such systems. Until sufficient cash flow is generated
from operations, the Company will utilize its current capital resources and
may seek external sources of funding to satisfy its capital needs. Cash
interest payments required under the terms of the Senior Discount Notes are
scheduled to commence on September 1, 2001. There can be no assurance that
the Company will be able to secure its capital requirements on terms and
conditions satisfactory to the Company. Accordingly, in the event the Company
is unable to secure funding for capital requirements on satisfactory terms
and conditions, the ability of the Company to sustain and expand operations
and fulfill its debt obligations could be materially adversely affected.
Net cash used in operating activities during the six months ended
June 30, 1999 was $4.6 million versus $3.9 million during the corresponding
prior year period. The increase in cash used in operating activities during
the six months ended June 30, 1999 is primarily due to the non-recurring
payments for severance, contract termination and professional service
advisors totaling $1.7 million as discussed within the SG&A section above.
These payments were partially off-set by lower systems operations and SG&A
expenses due to the Company operating its business within the confines of a
cash conservation strategy.
Net cash used in investing activities was $3.1 million during the
six months ended June 30, 1999 compared to $15.5 million during the
corresponding prior year period. Cash used in investing activities primarily
relates to the acquisition and installation of subscriber receive-site
equipment, the acquisition of certain wireless cable channel rights, the
investments in assets held for sale and the investment in equity affiliates.
The decrease in cash used in investing activities in the six months ended
June 30, 1999 as compared to the corresponding prior year period is primarily
due to a reduction in purchasing new licenses and leased license investments
and a reduction in purchasing additional subscriber and headend equipment for
the digital and analog markets.
Net cash used in financing activities was $0.5 million during the
six months ended June 30, 1999 compared to $1.1 million during the
corresponding prior year period. Cash used in financing activities during the
six months ended June 30, 1999 compared to the corresponding prior year
period is attributed to the repayment of the payables relating to the Basic
Trading Areas (BTA) totaling approximately $0.4 million and $0.9 million and
the repayment of other notes payable totaling approximately $0.2 million and
$ 0.2 million, respectively.
FUTURE LOOKING INFORMATION AND RISK FACTORS
The Company or its representatives may make forward looking
statements, oral or written, including statements in this Report's
Management's Discussion and Analysis of Financial Condition and Results of
Operations, press releases and filings with the Securities and Exchange
Commission ("Commission"), regarding estimated future operating results,
planned capital expenditures (including the amount and nature thereof) and
the Company's financing plans, if any, related thereto, increases in
subscribers and the Company's financial position and other plans and
objectives for future operations. There can be no assurance that the actual
results or developments anticipated by the Company will be realized or, even
if substantially realized, that they will have the expected effects on its
business or operations. Among the factors that could cause actual results to
differ materially from the Company's expectations are general economic
conditions, competition, government regulations and other factors set forth
among the risk factors noted in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
Generally, forward looking statements include words or phrases such as
"management believes," the "Company anticipates," the "Company expects" and
words and phrases of similar import. Forward looking statements are made
pursuant to the Private Securities Litigation Reform Act of 1995.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
All subsequent oral and written forward looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by these factors. The Company assumes no
obligation to update any of these statements.
The Company's future revenues and profitability are difficult to
predict due to a variety of risks and uncertainties, including (i) business
conditions and growth in the Company's existing markets, (ii) the costs and
level of consumer acceptance associated with the launch of systems in new
markets, (iii) the availability and performance of digital compression
equipment, (iv) the Company's existing indebtedness and the need for
additional financing to fund subscriber growth and system development, (v)
government regulation, including FCC regulations, and receipt of regulatory
approvals for alternative uses of spectrum, (vi) the Company's dependence on
channel leases, (vii) the ability of CAI to complete its proposed merger with
MCI WorldCom, (viii) the ability of CAI and the Company to attract an
alternate strategic partner in the event that the proposed merger is not
consummated and (ix) numerous competitive factors, including alternative
methods of distributing and receiving video transmissions.
Because the foregoing uncertainties could affect the Company's
future operating results, past performance should not be considered to be a
reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods. In
addition, the Company's participation in a highly dynamic industry often
results in significant volatility in the price of the Company's Senior
Discount Notes.
YEAR 2000 COMPLIANCE
OVERVIEW. An undetermined number of computer software programs have
been written using two digits rather than four to determine the applicable
year. As a result, date-sensitive computer software may recognize a date
using "00" as the year 1900 rather than year 2000. This could result in major
system failures or miscalculations, and is generally referred to as the "Year
2000" problem. A preliminary review of the Company's information systems has
been completed and a comprehensive program is currently in process to modify
or replace those systems that are not Year 2000 compliant
STATE OF READINESS. The Company's Year 2000 compliance program
focuses on the Company's analog video operations, limited Internet
operations, and internal business processes, such as accounting. As of March
31, 1999, the inventory, assessment and compliance planning phases for these
areas have been materially completed, and remediation, replacement or
retirement and testing activities are beginning. The inventory items that are
not assessed as Year 2000 compliant and that require action to avoid service
impact are expected to be fixed, replaced, or retired. Although significant
progress has been made, CS's goal for compliance of its accounting software
and any other mission critical systems relating directly to the accounting
function Year 2000 has been revised to September 30, 1999. Additionally, CS's
goal to have all other mission critical systems Year 2000 compliant by
September 30, 1999 is on schedule for completion.
VENDOR AND SERVICE PROVIDER ISSUES. The Company has requested that
its vendors and service providers provide CS with information as to the
compliance status of products and/or services used by CS and its operating
subsidiaries which information is subject to Company testing and
verification. Although the Company has received information from some of its
vendors and service providers, it has not yet received information from each
of the vendors and service providers it has identified. The Company will
continue to pursue its vendors and service providers in order to obtain the
necessary information regarding Year 2000 compliance of such vendors and
service providers.
In addition to the assessment of in-house systems, the Company is
currently assessing the readiness of its vendors for the Year 2000 problem
relative to the operation of their respective businesses. To determine the
status of third parties, letters inquiring as to their readiness have been
sent or are being sent to substantially all of the Company's vendors. The
Company will assess the vendors' responses and prioritize them in order of
significance to the business of the Company. Contingency plans will be
developed in the event that business-critical vendors do not provide the
Company with satisfactory evidence of their readiness to handle Year 2000
issues. The Company intends to make every reasonable effort to assess the
Year 2000 readiness of these critical business partners and to create action
plans to address the identified risks.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
COST. All maintenance and modification costs will be expensed as
incurred, while the cost of new software, if material, will be capitalized
and depreciated over its expected useful life. Testing and remediation costs
of all of the Company's systems and applications are currently estimated at
approximately $300,000 to $500,000 from inception in fiscal 1998 through
completion in fiscal 1999. These costs are estimated to be incurred during
1999 and funded from existing cash.
The Company does not believe the costs related to the Year 2000
compliance project will be material to its financial position or results of
operation. However, the cost of the project and the date on which the Company
plans to complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans, and other factors. Unanticipated failures by critical
vendors as well as the failure by the Company to execute its own remediation
efforts could have a material adverse effect on the cost of the project and
its completion date. As a result, there can be no assurance that these
forward-looking estimates will be achieved and the actual cost and vendor
compliance could differ materially from those plans, resulting in material
financial risk.
RISKS. The failure to correct a material Year 2000 problem could
cause an interruption or failure of certain of the Company's normal business
functions or operations, which could have a material adverse effect on its
results of operations, liquidity or financial condition. Due to the
uncertainty inherent in other Year 2000 issues that are ultimately beyond
CS's control, including, for example, the final Year 2000 readiness of its
mission critical vendors and service providers, the Company is unable to
determine at this time the likelihood of a material impact on its results of
operations, liquidity or financial condition, due to such Year 2000 issues.
The costs of the Company's Year 2000 program and the timetable for completing
its Year 2000 preparations are based on current estimates, which reflect
numerous assumptions about future events, including the continued
availability of certain resources, the timing and effectiveness of
third-party remediation plans and other factors. The Company can give no
assurance that these estimates will be achieved, and actual results could
differ materially from those currently anticipated. In addition, there can be
no assurance that the Company's Year 2000 program will be effective or that
its contingency plans will be sufficient. Specific factors that might cause
such material differences include, but are not limited to, the availability
and cost of personnel trained in this area, the ability to locate and correct
relevant computer software codes and embedded technology, the results of
internal and external testing and the timeliness and effectiveness of
remediation efforts of third parties.
The Company believes that the worst case scenario would be the
failure of the Company's subscriber management system addressing the headend
equipment, which sends the signal to the addressable controller units, as
well as the addressable controller units themselves. The controller units
communicate to the customer's set-top box. The loss of the ability to
transmit such data would result in the loss of customers and related
revenues, among other things.
CONTINGENCY PLAN. At June 30, 1999, the Company is not aware of any
mission critical aspect of its operations or internal business processes that
can not be made Year 2000 compliant, however, its inventory and assessment of
Year 2000 compliance is not yet completed. Due to the uncertainties presented
by third party Year 2000 problems, and the possibility that, despite its
efforts, the Company is unsuccessful in preparing its internal systems and
equipment for the Year 2000, the Company expects to develop contingency plans
for dealing with the most reasonably likely worst case scenario. The
Company's assessment of its most reasonably likely worst case scenario and
the exact nature and scope of its contingency plans will be affected by the
Company's continued Year 2000 assessment and testing. The Company has revised
its estimated completion date for such assessment to the third quarter of
1999 and to have all contingency systems in place and fully tested by the
fourth quarter of 1999.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company is assessing the reporting and disclosure requirements
of Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No. 133"). This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities. The statement is effective for financial
statements for fiscal years beginning after June 15, 2000. The Company
believes SFAS No. 133 will not have a material impact on its financial
statements or accounting policies. The Company will adopt the provisions of
SFAS No. 133 in the first quarter of 2001.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to legal proceedings incidental to its
business which, in the opinion of management, are not expected to have a
material adverse effect on the Company's consolidated financial position,
operating results or liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 K
(a) Exhibits
*27 Financial Data Schedule
(b) Reports on Form 8-K
None
*Filed herewith.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CS WIRELESS SYSTEMS, INC.
By: /s/ Jared E. Abbruzzese
-----------------------
Jared E. Abbruzzese
Acting Chief Executive Officer
and Director
(Principal Executive Officer)
By: /s/ John M. Lund
-----------------------
John M. Lund
Senior Vice President - Finance
and Chief Financial Officer
(Principal Financial Officer)
Dated: August 4, 1999
16
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